The Inflation Reduction Act expands the tax credit loophole

  • Most EVs sold today do not qualify for the full federal tax credit under the Inflationary Reduction Act because of where the vehicles or components are built.
  • But leasing vehicles can save drivers thousands of dollars.
  • Hyundai, Kia and Ford say they will increase the leasing of their EVs to lower prices and boost sales.

Dave Walters of Orange County, California, stands by his newly leased Hyundai Ioniq 5 electric vehicle.

Presented by Dave Walters

Frustrated by high gas prices and attracted by federal tax incentives, Dave Walters decided he wanted an all-electric Hyundai Ioniq 5 for his next vehicle.

Orange County, California, was the first to consider buying a used model, he could lease the vehicle and take advantage of a key loophole under the Inflation Depreciation Act.

If he buys a used Ioniq made in South Korea and Indonesia, he won’t get a $7,500 federal tax credit. A vehicle should be leased.

“I ran the numbers — what it would be like with leasing credit and without leasing credit — and that’s what got me going and was the main thing as to why I went in that direction,” he said. “It was a few hundred dollars less a month.”

Walters rightly points out that Hyundai Motor and other automakers have begun targeting EV leases to take advantage of a loophole in the IRA that allows vehicles manufactured outside of North America to qualify for the credits. Legislators like this US Sen. Joe Manchin, DW.V.Regarding the blocking rules.

Under an IRA, it is classified as a lease Commercial business is therefore exempt from regulations requiring that vehicle and battery components be manufactured in North America. Most EVs are for sale today Not eligible For full tax credit due to where the vehicles or parts are built.

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Before a joint session of Congress at the US Capitol in Washington on April 27, 2023, Sen. Joe Manchin, DW.V., speaks with fellow legislators on the House floor.

Elizabeth Frantz | Reuters

But as long as the companies that receive the credits pass the savings on to consumers, leased drivers could save thousands.

“I’m not surprised that manufacturers are saying they’re going to lease more,” said Cox Automotive Senior Economist Charlie Chesbro. “The IRA rollover on EVs and allowing us to qualify for that $7,500 is really a game changer and has a huge impact on our monthly payments.”

For a $50,000 EV and a 36-month lease, Chesbrough estimates the full $7,500 tax credit equates to $222 in monthly savings for a consumer.

Automotive research firm Edmonds found that 37% of EVs purchased in April were leased, up from 25% in the first quarter and 13% last year.

“This creates a loophole for automakers to target more affluent customers who can afford and actually get approved to buy an EV,” said Jessica Caldwell, managing director of Edmonds Insights. “It also allows them to level the playing field against competitors who get full tax breaks on purchases.”

According to Hyundai Motor America CEO Randy Parker, the percentage of Hyundai Ioniq 5 vehicles on lease jumped from about 2% earlier this year to more than 30% in April. Starting this month, the company is offering a $499-a-month lease deal for the vehicle — lower than the industry average lease amount of $577, according to Edmonds.

The Kia EV6 is on display at the New York Auto Show on April 13, 2022.

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Scott Mill | CNBC

“We want to highlight the lease as much as we can, so we can continue to take advantage of the tax credit and take advantage of the consumer tax credit,” Parker told CNBC. “Now, that’s how the cards are dealt.”

Kia and Ford have also said they will increase sales of their electric vehicles by lowering prices and increasing leases.

Kia expects to increase its EV leases from under 15% now to 40% in the coming months, Watson said. Like Hyundai, Kia is offering a $499 lease deal for its EV6 with an initial payment of $4,999.

“For the next several years, to get customers that $7,500 credit, Kia will have to lean heavily on leasing. That’s what we intend to do,” said Eric Watson, Kia’s vice president of sales operations. America.

Before the IRA passed, Hyundai and Kia, owned by the same South Korean parent company, were second in EV sales in the U.S. behind Tesla. But their sales have lagged those of General Motors and Ford, both of which have vehicles that qualify in whole or in part for federal tax credits.

Hyundai and other automakers that became ineligible for credits under the IRA opposed the regulations, seeking a longer period for broader exemptions based on the new rules or their US EV plans.

“It gives us a lifeline. I wouldn’t call it leveling the playing field,” Watson said of the lease eligibility for the $7,500 tax credit.

President Joe Biden stands next to a Ford Mustang Mach-E SUV as he visits the Detroit Auto Show to highlight electric vehicle manufacturing in the U.S. on Sept. 14, 2022.

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Kevin Lamarck | Reuters

A Ford spokeswoman said the company’s credit division is working on a lease strategy for electric vehicles like the Mustang Mach-E, which are made in Mexico and qualify for half of the federal tax credit if they buy now. The company’s electric Ford F-150 Lightning is eligible for a full $7,500.

“We’re going to be leasing electric vehicles, and you’ll be hearing about that from us very soon,” Ford CFO John Lawler said last month.

A GM spokeswoman said the company has not changed its leasing strategy for EVs because all its vehicles qualify for full tax credits. Only about 3% of GM’s EVs are leased, he said.

Although lease terms are typically only a few years, automakers touted EVs as attracting new customers to their brands.

“The more you get these customers within your brand, especially with new technology, I think you have a better chance of keeping them,” Edmonds Caldwell said.

For many consumers, like Walters, who traded in a 2009 Nissan Murano, a short-term lease may be an attractive option because EVs are a growing industry with changing technologies and a significant number of new entries.

“I just wanted to dip my toe into it and see if I really like it. It’s only been six weeks, but so far so good.” Walters said. “I really enjoy driving it and not having to pay for gas.”

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